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OPTIONS CHEAT SHEET CONTENTS

OPTIONS STRATEGIES 3

EXPLANATION OF OPTIONS 5

OPTION TYPES 5

OPTIONS PRICING 6

THE 7

OPTIONS 8

PATTERN DAY TRADER (PDT) 9

OPTIONS TERMINOLOGY 10

2 www.simpleoptionstrategies.com OPTIONS STRATEGIES

NET POSITION STRATEGY DESCRIPTION PROFIT/LOSS @ EXPIRATION

Consists of buying calls for investors Long Call Net Position The potential profit is un- who want a chance to participate limited, while the potential + Long Call in the underlying ’s expected losses are limited to the pre- appreciation during the term of the 0 50 55 60 65 70 mium paid for the call. . -

Consists of buying puts and will prof- it if the stock price moves lower. It Long Put Net Position

is a candidate for bearish investors The potential profit is sig- + Long Put who want to participate in an antic- nificant, but the losses are ipated downturn, but without the limited to the premium paid. 0 50 55 60 65 70 risk and inconveniences of selling - the stock short.

This strategy consists of writing Maximum profit of the un- (selling) a call that is covered by an Net Position derlying stock is capped equivalent long stock position (100 by the option’s + shares). It provides a small hedge on Covered Call and life. The main benefit is the stock and allows an investor to the option premium income 0 50 55 60 65 70 earn premium income, in return for - which lowers the stock’s temporarily forfeiting much of the break even cost. stock’s upside potential.

A cash secured put involves writing (selling) a with the re- Limited to the premium col- Net Position served cash. The strategy is to either lected or a substantial loss if + collect the premium if the stock rises the seller is unwilling to pur- Cash- Secured Put and expires out of the money or to chase the underlying stock 0 50 55 60 65 70 collect the premium and purchase at the strike price if the - the stock at or below the strike price stock expires in the money. if it expires in the money.

Profit and loss are very lim-

An investor writes a and ited, depending on the dif- Net Position buys a put option with the same ex- ference between the strikes. piration as a means to hedge a long The issues for the protec- + Collar position in the underlying stock. This tive collar investor concern 0 50 55 60 65 70 strategy combines two other hedg- mainly how to balance the - ing strategies: protective puts and level of protection against covered call writing. the cost of protection for a worrisome period.

3 www.simpleoptionstrategies.com NET POSITION STRATEGY DESCRIPTION PROFIT/LOSS @ EXPIRATION

Profit and loss are limited and well-defined. The initial Contains two calls with the same net credit is also the maxi- Bear Call Spread Net Position expiration but different strikes. The mum potential profit. Profits Bear Call Spread strike price of the short call is below at expiration start to erode + (Credit Call Spread) the strike of the long call, and will if the stock is above the low- 0 50 55 60 65 70 generate a net cash inflow (net cred- er strike price, and losses - it) at the outset. reach their maximum if the stock hits the higher strike price.

Profit and loss are limited and well-defined. The initial Contains two puts with the same net credit is also the maxi- Bull Put Spread Net Position expiration but different strikes. The mum potential profit. Profits Bull Put Spread strike price of the short put is above at expiration start to erode if + (Credit Put Spread) the strike of the long put, and will the stock is below the higher 0 50 55 60 65 70 generate a net cash inflow (net cred- (short put) strike, and losses - it) at the outset. reach their maximum if the stock falls to, or beyond, the lower (long put) strike.

Profit and loss are limited and well-defined. The net Contains two puts with the same premium paid at the outset Bear Put Spread Net Position expiration but different strikes. The establishes the maximum Bear Put Spread strike price of the short put is below + loss. The maximum profit is (Debit Put Spread) the strike of the long put, and will re- limited to the difference be- 0 50 55 60 65 70 quire a net cash outlay (net debit) at tween the strike prices, less - the outset. the debit paid to put on the position.

Profit and loss are limited and well-defined. The net Contains two calls with the same Bull Call Spread Net Position premium paid at the outset expiration but different strikes. The establishes the maximum Bull Call Spread strike price of the short call is above + loss. The maximum profit is (Debit Call Spread) the strike of the long call, and will re- limited to the difference be- 0 50 55 60 65 70 quire a net cash outlay (net debit) at - tween the strike prices, less the outset. the debit paid to put on the position.

The primary benefit of using an is that mar- Short Condor Net Position gin for only one side of the Made up of a Bear Call Spread (Cred- trade is required for both + Iron Condor it Call Spread) and a Bull Put Spread a Bear Call Spread (Credit (Credit Put Spread). Call Spread) and a Bull Put 0 50 55 60 65 70 - Spread (Credit Put Spread) while benefiting from the potential profit of both.

4 www.simpleoptionstrategies.com EXPLANATION OF OPTIONS

Options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option. Each contract is typically worth 100 shares of the underlying stock. For Indexes and Futures, settlement at expiration is assigned on a cash basis since there is no asset as there would be for a stock.

OPTION TYPES

Gives its holder the right to buy 100 shares of the underlying security at the strike price, anytime before the option’s expiration CALL OPTION date. The writer (or seller) of the option has the obligation to sell the shares.

Gives its holder the right to sell 100 shares of the underlying security at the strike price, any time before the option’s expiration PUT OPTION date. The writer (or seller) of the option has the obligation to buy the shares.

Options can be sold or bought back by the holders at any time before they expire.

5 www.simpleoptionstrategies.com OPTIONS PRICING

INTRINSIC VALUE INTRINSIC CURRENT STRIKE (CALLS) VALUE* STOCK PRICE PRICE

A call option is in-the- money when the underlying security’s price is higher than the strike price.

INTRINSIC VALUE INTRINSIC STRIKE CURRENT (PUTS) VALUE* PRICE STOCK PRICE

A put option is in-the- money if the underlying security’s price is less than the strike price.

TIME VALUE INTRINSIC OPTION INTRINSIC VALUE* PREMIUM VALUE*

Time value is any premium in excess of intrinsic value before expiration.

*Only in-the-money options have intrinsic value. It represents the difference between the current price of the underlying security and the option’s price, or strike price. The Intrinsic Value cannot be negative.

6 www.simpleoptionstrategies.com THE GREEKS

The option’s delta is the rate of change of the price of the option with respect to its underlying security’s price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price. Far DELTA out-of-the-money options have delta values close to 0 while deep in-the-money options have deltas that are close to 1 Delta is also often used as a probability factor the strike price may end up “in the money” at expiration. So a delta of .10 means approximately that there is a 10% probability that the associated strike Δ price will end up in the money at expiration.

The option’s gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage or decimal and reflects the change in the delta in response to a one point movement of the underlying stock price. Like the delta, the gamma is constantly changing, even with tiny movements of GAMMA the underlying stock price. It generally is at its peak value when the stock price is near the strike price of the option and decreases as the option goes deeper into or out of the money. Options that are very deeply into or out of the money have gamma values close to 0. Γ

The option’s theta is a measurement of the option’s time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration date draws nearer. Generally expressed as a negative number, the THETA theta of an option reflects the amount by which the option’s value will decrease every day. The closer the Strike is to expiration, the greater the rate of premium decay. Θ

The option’s vega is a measure of the impact of changes in the underlying on the option price. Specifically, the vega of an option expresses the change in the price of the option for every 1% change in underlying volatility. Options tend to be more expensive when volatility is higher. Thus, whenever VEGA volatility goes up, the price of the option goes up and when volatility drops, the price of the option will also fall. Therefore, when calculating the new option price due to volatility changes, we add the vega when volatility goes up but subtract it when the volatility falls. ν

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• On the last trading day, trading in expiring SPXW Weeklys WEEKLY, QUARTERLY, END closes at 3:00 p.m. (Chicago time). All non-expiring SPXW OF MONTH INDEX Weeklys continue to trade until 3:15 p.m. (Chicago time). OPTIONS • As for all Weeklys, SPXW Weeklys will not be listed if they would expire on the same day on which a different expiration already exists, i.e., standard 3rd Friday, End of Month or Quarterly expirations. In addition, if the listing or expiration dates fall on a holiday, the dates will be adjusted as follows in the below chart.

SPXW LIST DATE IF HOLIDAY EXPIRATION DATE IF HOLIDAY

Friday EOW Thursday Prior Day Friday Prior Day

Wednesday Weeklys Tuesday Prior Day Wednesday Prior Day

Monday Weeklys Friday Prior Day Monday Following Day

• American Style: Third Friday of the Month and stop trading MONTHLY at 4 PM Eastern. OPTIONS • European Style: Third Friday of the month and stop trading the third Thursday of the month at 4 PM Eastern, however options prices are affected by overnight futures trading. So options that are out of the money (OTM) after trading stops, may be in the money (ITM) at the time of settlement on Friday morning. • Expire at time of settlement on the third Friday morning of the month.

9 www.simpleoptionstrategies.com AMERICAN • Can be exercised at any time and automatically exercised if STYLE OPTIONS $.01 ITM at time of expiration. • Settlement could occur after time of expiration during after hours trading.

EUROPEAN STYLE OPTIONS • Can only be exercised at time of expiration and automatically exercised if $.01 ITM.

SETTLEMENT • Equity Options are settled with Stock, while Index Options are settled in cash.

PATTERN DAY TRADER (PDT)

You must be aware of the PDT restrictions since SPX Options do fall under the FINRA Regulations. In order not to fall under the PDT restrictions, you are required to maintain over $25,000 in your trading account. If you fall below $25,000, you are only allowed to make three day-trades within a five day period. If you exceed three day-trades within a five day period, your account will be flagged by your broker as a Pattern Day Trader. Example trades are: Buy to open and sell to close. Selling to open an Iron Condor and buying to close each spread separately constitutes two day trades. Brokers have different guidelines for how to address a flagged account, but most will allow you to lift the flag a certain number of times if you agree that you are not a Pattern Day Trader. However, your account can be restricted up to three months to only allowing you to only close positions and not open them.

10 www.simpleoptionstrategies.com OPTIONS TERMINOLOGY

Options that can be exercised at any point during the life of the AMERICAN OPTIONS contract. Most exchange-traded options are American.

An option whose strike price is equal to the market price of the AT-THE-MONEY underlying security.

BUY TO OPEN (BTO) This is where a trade or position is initiated and it is a buy order.

BUY TO CLOSE (BTC) This is where a trade or position that is open is an order to close.

An option that gives the holder the right to buy the underlying CALL security at a particular price for a specified, fixed period of time.

An option that represents 100 shares of an underlying stock. CONTRACT Other asset classes such as Indexes and Futures, use other multipliers associated with those asset classes.

An option strategy in which the writer of a call option holds a long COVERED CALL position in the underlying security on a share-for-share basis.

An option in which the writer of a put option holds a short COVERED PUT position in the underlying security on a share-for-share basis.

An option seller who owns the option’s underlying security as a COVERED WRITER hedge against the option.

The date that an option becomes void. Most options expire at DATE OF EXPIRATION the close of business (4:00 p.m. ET) on the third Friday of the expiration month.

11 www.simpleoptionstrategies.com An investment product that derives its value from an underlying asset. Options are derivatives.

The exercise of an option before its expiration date. Early EARLY EXERCISE exercise can only occur with American-style options.

An option that can only be exercised automatically during a EUROPEAN OPTIONS particular time period just before its expiration and not any other time.

An investor who buys an option and makes a premium payment HOLDER to the writer.

An option that has an intrinsic value. A call option is considered IN-THE-MONEY (ITM) in-the-money if the underlying security is higher than the strike price.

(Long-term Equity Anticipation Securities) – LEAPS are publicly LEAPS traded options that have expiration dates longer than one year.

A put or call option that is traded on an options exchange. The LISTED OPTION terms of the option, including strike price and expiration date, are standardized by the exchange.

An option position in which the writer of the option does not NAKED OPTION have an offsetting position in the underlying security, thereby having no protection against adverse prices moves.

The total number of outstanding option contracts in the exchange market on a particular day.

A financial derivative that gives the holder the right, but not the obligation, to either buy or sell a fixed amount of a security or OPTION other financial asset at an agreed-upon price (the strike price) on or before a specified date.

An option with no intrinsic value, that would be worthless if it expired on that day. A call option is out-of-the-money when the OUT-OF-THE-MONEY (OTM) strike price is higher than the market price of the underlying security. A put option is out-of-the-money when the strike price is lower than the market price of the underlying security.

12 www.simpleoptionstrategies.com An option that is not traded over an exchange. An over-the- OVER-THE-COUNTER (OTC) counter option has no standardization of strike prices and expiration dates.

The total cost of the option. An option holder pays a premium to the option writer in exchange for the right, but not the obligation, PREMIUM to exercise the option. The option’s premium is its intrinsic value combined with its time value.

An option that gives the holder the right to sell the underlying PUT security at a particular price for a specified, fixed period of time.

SELL TO CLOSE (STC) This is trade or position that you sell to close.

SELL TO OPEN (STO) This is a trade or position that you sell to open.

The agreed-upon price at which an option can be exercised. The strike price for a call option is the price at which the security can be bought (prior to the expiration date); the strike price for a put STRIKE PRICE option is the price at which the security can be sold (before the expiration date). The strike price is sometimes called the exercise price.

The collective conditions of an options contract that define the TERMS strike price, expiration date and the underlying security.

The security that is subject to being bought or sold upon the UNDERLYING SECURITY exercise of an option.

An investor who sells an option and who collects the premium WRITER payment from the buyer. Writers are obligated to buy or sell if the holder chooses to exercise the option.

13 www.simpleoptionstrategies.com www.simpleoptionstrategies.com